Valuation of a usufruct: in complete (r)evolution?

Much has been said and written in the past few years about the valuation of a usufruct and where the fiscal shoe pinches. An overview of valuation problems, current trends and a look at future property planning is provided below.

Valuation of a usufruct

Valuation of a usufruct: a changing world
Usufruct is one of the oldest property rights known and was already applied in Roman times. Usufruct was introduced in Roman law with the intention of keeping certain goods in the family while enabling third parties to enjoy the fruits of these goods for a specific period. For most of the last century, usufruct was applied in Belgium only to families, i.e. well-known usufruct for the surviving spouse. However, this property right only began to be applied to companies from the 1980s and 1990s. This lead to the question being raised of how usufruct could be valuated for companies whose situation is clearly different from that of natural persons.

Most valuations were initially subject to the 80% rule in Article 47 of the Registration Fees Code. This article states, inter alia, that the usufruct may not, in any circumstance, be assigned a value higher than 4/5th of the sales value of the whole property. Most usufructs were therefore simply valuated at the permitted legal maximum, without requiring any economic justification. The article published in 1999 by Ruysseveldt and Janssens (J. Ruysseveldt & P. Janssens, “De waardering van vruchtgebruik, anders bekeken…”, Not. Fisc. M. 1999, issue 5, p. 105-111) introduced a set of valuation methods. This plurality of methods, however, was not adopted in practice by professionals. To make it manageable on a practical level, one calculation was identified from the full set of calculations and called the “Ruysseveldt method”. Knowing that all of the calculations were produced by Mr Janssens, this linguistic confusion (since it is named after the first of the two authors) is symptomatic of this episode.

Considered the norm by the Administration until recently, this method does not inherently take into account the balance between the returns of the usufructuary and the bare owner. This method simply updates the rental value based on the interest rate of linear bonds. The application of this method resulted in very high valuations of the usufruct which suddenly and visibly went through the roof because of the financial crisis (they were sometimes more than 100% of the value of the whole property). This method gave rise to very unequal returns for both usufructuary and bare owner.

Practitioners increasingly realised that the “Ruysseveldt method” was not correct. It did not take long for the Administration to react to this method. For the first time in 2010, a ruling was pronounced in which the Ruling Commission would not only calculate the usufruct in order to divert bare ownership (bare ownership is thus equal to the value of the whole property minus the usufruct value), but would also make a separate calculation of the bare ownership. The usufruct value was then determined by deducting the bare property value from the whole property value. The Ruling Commission found that the result of both calculations was very different and therefore decided to establish the usufruct value in a more balanced manner. This was the first time that the Ruling Commission deviated from the Ruysseveldt method, but it took some time before repeating it. The pressure of the mainstream Ruysseveldt valuation method was too big and so the Ruling Commission provisionally succumbed to the power of numbers. The Ruysseveldt method was (temporarily) given prominence again.

In 2016 the tide on usufruct valuation began to turn. Some tax officials began to oppose this valuation method and achieved varying degrees of success at the courts (Louvain). Coincidentally, the Ruling Commission came back on the scene. This was clearly not coincidental but an expression of displeasure from the usufruct experts who could no longer reconcile with the mathematical anomalies of the Ruysseveldt method.

More specifically, the Ruling Commission developed (read: copied) its own usufruct valuation method in 2016. The Ruling Commission was to apply this method from then onwards but omitted to specify that this was the only possible method. It continued to leave the other methods intact (although the Ruysseveldt method would not be spared much leniency). Many positive rulings followed the publication of this method where all but one complied with the application of the Ruling Commission’s new method. No further trace of the Ruysseveldt method is to be found. The one alternative method that was approved (for which no details were published) produced an almost identical (just slightly lower) result to that of the Ruling Commission method. However, the Ruling Commission’s method generally produces usufruct valuations that are (too) low. Moreover, it has still not created situations in which the returns of the usufructuary and the bare owner are similar and comparable, which is nevertheless the intention of this method.

It seems now that the days of the Ruysseveldt method are numbered. An internal instruction of 2018 by the Administration has shown that it will no longer allow verifying officers to use the Ruysseveldt method to carry out usufruct controls in the future, but will use the Ruling Commission’s method. The Ruysseveldt method is therefore a thing of the past, forever. It turns out, however, that this 2018 internal instruction has also spurred tax inspectors to go back to past valuations. This seems to be unjust and contrary to the principles of good governance. Minister of Finance Johan Van Overtveldt also confirms this and states that: “The rules need to be applied correctly. But there can be no question of retroactivity. The new method of the Ruling Commission can only be used after it has been published". As a footnote to this quote, it is important to mention that valuations that were compliant with the previous method must remain untouched. In the meantime, the initial difficulties have subsided and the tax authorities seem to be easing off on historical usufructs. Manifestly incorrect valuations (according to the former method) can of course be addressed. We can therefore conclude that if the fiscal aspects of your case were handled correctly in the past, there should be no tax implications today.

Valuation of a usufruct 2.0
The Administration’s internal instruction and the Ruling Commission’s glorified method are certainly not an end point but only a part of the process. The authors themselves have warned about this for many years. The Ruling Commission’s method is also not quite correct yet. As mentioned above, its usufruct valuations are often too low and there is still no guaranteed equality between returns. This new vision on valuations of a usufruct paves the way for new valuation methods that take into account the equality of returns. Several authors already predicted the inevitable demise of the Ruysseveldt method and prepared themselves for the future. The Spartax method is an example of a method that takes into account the similarity and comparability of returns.

It should not be forgotten that usufruct valuations do not only consider the fiscal aspect. In practice, valuations are carried out in conjunction with the matrimonial property regime. When a usufruct is initially valuated incorrectly, it can create very serious problems in the future. In other words, valuations go beyond taxation and are also affected by other branches of law.

So the question to ask in 2018 is to determine whether a usufruct still makes sense, and if it does, how do we valuate? To provide a full answer would be beyond the scope of this article. However, many technical elements will need to be taken into account (e.g. impact on rental value, additional expenses, etc.). “Valuations are hard work”, and will always be. Simply entering some numbers in an Excel file offers no guarantee of a correct valuation. The real estate market itself also has a considerable impact on valuations. One example is the rise in land prices in Ghent city centre which have a huge impact on valuations. We can describe the situation as follows: people invest massively in real estate in Ghent because the returns from savings accounts today are practically nil. This investment rush causes the price of real estate in Ghent to soar while the rental values remain stable. Rental yields decrease causing valuations to decrease as well. Another example is the crash of the Antwerp rental market. Rental prices decreased significantly while purchase prices remained stable. Rental yields decreased, resulting in decreased valuations of the usufruct. In such situations, the question must be asked as to whether usufruct is still the best option and whether the property tax specialist should find other solutions.

Property planning of the future
It is clear that property planning finds itself in turbulent waters. It was already predicted that the historical methods for usufruct valuations would end up not being immune to rejection and this has indeed been the case. Although property taxation has already been extensively overhauled, the question arises as to whether or not the biggest revolutions are still to come. The property tax specialist must ensure that he is properly equipped to tackle the issue. The current fuss is likely to be a hothouse for future ideas.

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